Dr. Ashraf Mahate, Head of Export Market Intelligence, Dubai Exports, underlines how SMEs can balance their limitations with the need to innovate and adapt for growth.
The modern world of commerce is characterised by globalisation, whereby SMEs need to export to not only grow, but also survive. In this highly competitive environment competitors do not wait for national SMEs to grow at their own pace, but instead seek to eat into their market.
Advances in information technology and telecommunications have greatly assisted firms in being aggressive, not only in domestic but also in foreign markets. Today, even the smallest of firms can create global awareness of its products or services in an affordable manner. At the same time technology has also allowed SMEs to locate their operations at the most optimal sites so as to capitalise on cost, economies of scale and scope and the ability to meet the urgency of customer demands.
However, the same technology is also a source of competitive danger as customers can easily access scores of websites that can provide them with a complete assessment of the product or service in question.
With such availability of information at great ease, SMEs that cannot, or do not , provide products or services that meet the quality and cost levels demanded by customers will be severely disadvantaged.
Even if SMEs manage to achieve the required quality at a market acceptable cost, it does not imply that this advantage will hold for long. Continuous improvement and innovation in quality, price and services by competitors, both domestic and international, implies that the competition frontier is constantly raised. At the same time, the rate of globalisation has allowed new players to enter the market at any time and sometimes from the most unsuspecting of nations.
These new players also tend to be recipients of increased productivity through being part of industrial clusters and value chains. Then, one has the issue of an ever increasing number of free trade agreements that provide trade benefits to companies in the signatory countries to the disadvantage of others.
Under this globally changing environment, the success and survival of SMEs in their domestic and foreign markets requires for an unprecedented strategy that seeks to provide continuous global competitive advantage. Anything less simply implies that the SME risks losing market share, not only in overseas markets, but also their home territory.
There is a distinct three-way divide between SMEs in all countries, namely those that see globalisation as an opportunity and develop strategies to take advantage of the changing situations. These SMEs have advanced manufacturing capabilities and are able to capitalise on the changes in communications, technology and production.
Secondly, there are SMEs for whom globalisation poses new competitive challenges and threats from overseas firms. By and large, these SMEs have the potential to be globally competitive if they enhance their production capabilities to meet international standards. However, the question as to whether they upgrade their manufacturing capabilities depends on their ability to deal with the increased competition and willingness to invest.
Those SMEs that do not adapt and upgrade their capabilities will most likely not survive in the long run. Thirdly, there are local producers with very limited capabilities. In general, these SMEs tend to be relatively small and service only local customers. Over time this group of SMEs may not be able to survive the foreign competition in their domestic market.
This group of SMEs is most likely to suffer from foreign competition as their ability to attract customers through personal relationships weakens with the availability of better, faster and cheaper alternatives.
In the long run, only two types of SMEs will remain, namely those who have taken advantage of the new opportunities and invested in their manufacturing capabilities to bring them up to international standards on price, quality, and delivery. In doing so, these SMEs will more likely have expanded way beyond their home market into new export markets, assisted by continuous improvements in their products and processes.
The second group of SMEs will be those that do not invest in developing their capabilities, or seek to continuously improve their products and process. As a result these SMEs will always be marginal players in the market on a tightrope between survival and failure.
With such high stakes, it’s important for SMEs to aim for growth but the question that arises is how can they achieve this goal? There is no single magical formula that an SME can utilise to become a high growth company. What we do know is that one important factor to the success and the growth of SMEs lies in its ability to export across a diversity of countries.
As such the SME needs to see the global marketplace as its target and to focus its products and processes so that they are capable of meeting the international challenges. In a previous article in this magazine, I have referred to these type of SMEs as born global as right from the start they are focused on the international market. International trade is not a gateway to growth simply because of the much larger consumer base but also the manner in which the firm has to operate.
Academic evidence suggests that firms that export tends to be 30% more productive compared to those that have very little or no international trade exposure. The fact that a company is exporting implies that it is competing with the best firms in the sector throughout the world. As a result, the SME itself is forced to enhance its capabilities to make inroads into global markets.
Next, the pace of change in global markets is higher and hence the SME is required to be better than its competitors and hence innovation becomes unavoidable. Finally, the ability to service a large consumer base implies that the SME is able to exploit economies of scale and hence become globally competitive.
Another important factor that determines whether an SME aims for growth is the strategic decisions that it makes. In an SME, strategic decisions are typically made by the owner(s) and hence they are typically affected by their intentions. In large firms one has the agency problem because owners are not involved in the day-to-day decision-making of the company.
In the case of SMEs, one has an equally damaging situation whereby the growth objectives are often tied to the owner (also tends to be the manager’s personal goals). The personal objectives and the goals of the SME may not always be synchronised and hence growth becomes the victim. In other words growth has to be a key intention of the SME if it is to take place in a well-planned and sustainable manner. This implies that growth is not simply a product of chance but clear management decision making process and choice.
Of course, growth can take place even when not intended, however, this tends to be ad hoc with a higher levels of risks. Therefore, if the owners want the SME to grow, then it has to be a clear priority within the firm and decisions need to be based around this goal. In fact, the aversion to growth is an important reason to explain why many SMEs actually stagnate and decline.
Once the SME has decided that growth is the key aspect of its strategy, then it has four options that are to extend into its current market (market penetration). The SME can then develop new products for existing and new markets and identify new markets for its existing range of products.
In doing so, the SME seeks to extend the product life cycle of its current portfolio of products. Finally, the SME can enter into new markets with new products. Of these four options the most appropriate growth strategies are those that focus on developing new markets and products.
It is often argued that if one has a sufficiently differentiated product then entry into new markets is relatively straightforward. The key to a differentiated product is innovation. Of course, marketing can help create psychological differences, but they tend to be temporary as consumers realise the true benefits of the product. Just as growth has to be an integral part of the company’s strategy so does innovation. It’s not enough to have a cleverly crafted vision or mission statement that incorporates innovation.
The company has to demonstrate innovation in its day-to-day operations. For instance, 3M encourages its technical team to spend 15% of their time working on innovative projects. Other companies such as Adobe have created an entire department devoted to innovation. For resource constrained SMEs both of these examples may be farfetched, but there is no reason why SMEs cannot take small steps towards innovation.
The important point is that innovation within the firm makes it easier to constantly review its products and respond to the changing
market environment. This is more so the cases if the innovation is focused on two areas namely production efficiencies and meeting customer needs in a better manner.
So, what stops SMEs from being innovative and hence aiming for growth? Academic evidence has found that one of the most common barriers to innovation within SMEs is the need to deal with today’s issues. In other words, most SMEs tend to fire fight with day-to-day problems and have little time to think about their processes, products or even what their customers may actually demand.
This implies that most SMEs tend to be followers in the marketplace, rather than leaders. Any innovation, however minor, is a risk as far as the firm is concerned. Innovation seeks to change the status quo and make the firm different from its competitors. However, this is a source of risk for SMEs who believe that there is safety in being the same.
By being different there is a probability that a SME can fail and this is its greatest barrier. There is no reason to expect that all innovation will be successful, but as long as the SME listens to its customers and develops products that meet their needs, the probability of failure can be reduced.
SMEs have only one long-term strategy, which is to aim for growth which itself calls for it to be innovative and export oriented. Of course, innovation has risks attached to it, but then the risk of not changing is far greater as the competitors will not be merciful with those failing to keep pace.
Dr. Ashraf Mahate is the Head of Export Market Intelligence at Dubai Exports (formerly known as the Dubai Export Development Corporation), which is an agency of the Dubai Economic Department. Dr. Mahate is also the Vice Chair of the Economic Policy Committee with the Dubai Economic Committee with the Dubai Economic Department. He has written a number of journal articles, chapters in books and edited books in the areas of economics, finance and banking. He has also presented papers at major international conferences. Dr. Mahate has provided extensive consultancy services to various organisations in the areas of banking, economics and finance. He has been a director of a number of companies including a venture capital company and a private equity fund.
Dr. Mahate received his doctorate from Cass City University Business School in London (UK) which was ranked by the Financial Times newspaper as the 12th best university in the world for finance. He read Economics at University College London, followed by a Masters in International Economics and Banking at the University of Wales in Cardiff. Dr. Mahate is a professional educator and received his training at the Institution of Commercial Management (UK). He is also a member of the Association of Certified Anti-Money Laundering Specialists. (ACAMS)